Liberty Nat'l Co. v. Commissioner

LIBERTY NATIONAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Liberty Nat'l Co. v. Commissioner

Docket No. 22372.

United States Board of Tax Appeals

18 B.T.A. 510; 1929 BTA LEXIS 2024;

December 16, 1929, Promulgated

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Where one member of a group of corporations, affiliated for income-tax purposes, purchases certain bonds from another member of the same group during the period in which consolidated returns are filed by the group, and, after the termination of such period under the provisions of section 240(a) of the Revenue Act of 1921, sells to the public the bonds so purchased, the basis for computing gain or loss from such sale is the cost of the bonds to the corporation which sells to the public.

Charles F. Miller, Esq., and Glenn J. Homan, Esq., for the petitioner.

Arthur H. Murray, Esq., for the respondent.

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LANSDON

The respondent has asserted a deficiency in income tax for the calendar year 1922, in the amount of $2,774.64. The single issue presented in this proceeding is the determination of the correct basis for computing the profit realized from the sale of certain Liberty bonds acquired by a parent corporation and by it sold to its subsidiary within the period of affiliation for tax purposes, and subsequent to the end of such period resold to the public by the subsidiary.

FINDINGS OF FACT.

The petitioner is an Oklahoma corporation, organized in 1918. It maintains its principal office in Oklahoma City. Its amended articles of incorporation set forth its purposes in the following terms:

SECOND: That the purposes for which this Corporation is formed are to purchase or acquire in any lawful manner, to hold, own, mortgage, pledge, sell, lease, transfer or any manner dispose of, to deal and trade in, real estate, goods, wares merchandise and property of any, all and every kind, class and description not prohibited by law; to loan money and take security therefor; to act as agent for individuals; corporation, firms or anyther persons; to sell property on the commission plan; and to do any other business not specifically prohibited by law.

The Liberty National Bank was organized under the National Banking Act. It conducts a general banking business in Oklahoma City.

From the date of its organization until the close of the taxable year 1921 the petitioner and the Liberty National Bank filed consolidated income-tax returns, which were accepted by the Commissioner. For 1922 the two corporations elected to file separate returns in accordance with the provisions of section 240(a) of the Revenue Act of 1921, and the returns so filed were accepted by the Commissioner.

Prior to 1921 the Liberty National Bank purchased Liberty bonds of the par value of $750,000 from the public and paid therefor the amount of $713,038.25. On December 6, 1921, the petitioner purchased such bonds from the Liberty National Bank, giving its check therefor in the amount of $735,000. The funds with which to purchase the bonds from its parent corporation were largely borrowed by petitioner from outside banks. Upon acquisition of the bonds they were entered on petitioner's books at their par value of $750,000, and a reserve for discount on bonds was set up in the amount of $15,000. Soon after such purchase, and in 1921, certain of the bonds having a par value of $9,200 were sold and the profit derived from such sale was included in the consolidated net income reported by the two corporations for 1921.

In computing the consolidated net income of the petitioner and the Liberty National Bank for the year 1921 the respondent recognized no profit on the intercompany sale of Liberty bonds.

During the first part of 1922 the petitioner sold the remaining Liberty bonds of a par value of $740,800, for which it had paid the amount of $725,984, to outside parties, and received therefor the amount of $726,128.36. On its income-tax return for that year it reported as profit the difference between the proceeds of the sale of the bonds and the cost at which it purchased them from the Liberty National Bank. Upon audit of petitioner's 1922 return the respondent determined a profit of $21,505.21, holding that the original cost of the bonds to the parent corporation of the affiliated group was the proper basis for the computation of gain rather than the price at which they were acquired by the petitioner from the Liberty National Bank.

OPINION.

LANSDON: None of the facts material to this proceeding are in dispute. The only issue here is the determination of the proper basis for computing the gain or loss resulting from the sale of bonds by the petitioner in the taxable year in the circumstances set forth in full in our findings of fact. The respondent contends that the correct basis for such computation is the cost of the bonds to the Liberty National Bank and that the sale of the bonds by such bank to its subsidiary corporation was an intercompany transaction which could neither result in income taxable to the affiliated group nor establish a basis for the computation of gain resulting from the sale of such bonds, subsequent to the election to file separate returns. The petitioner contends that the amount which it paid for the bonds on December 6, 1921, is the cost thereof to it and relies upon section 202(a) of the Revenue Act of 1921, which is as follows:

That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; * * *

Except for the purposes of Federal income tax, the two concerns herein involved during all the time material to this proceeding were separate corporate entities. Each was created for certain definite purposes set forth in its charter or articles of incorporation. No law known to this Board barred either corporation from dealing with the other, although for tax purposes such transaction could not result in taxable gain or deductible loss during the period in which consolidated returns were required. In the course of its business the petitioner purchased certain bonds and paid therefor the amount of $725,984. Later, and after the election to file separate returns, in conformity with an act of Congress, it sold the same property for $726,128.36. Clearly, since the property involved was not subject to depreciation, the gain or loss from such sale was the difference between cost and selling price. To hold otherwise would be to extend the purposes and effects of affiliation for income-tax purposes by implication and this is not within the power of the Commissioner or of the Board. The plain language of the law must prevail. ; ; ; and .

Reviewed by the Board.

Decision will be entered for the petitioner under Rule 50.

TRAMMELL, GREEN, and MURDOCK dissent.